Citi “weighs options”

The sell-off in Citigroup shares has led executives to start laying out possible contingency plans. In addition to pondering a move to sell the entire company to another bank, executives have started exploring the possibility of selling off parts of the firm, including the Smith Barney retail brokerage, the global credit-card division and the transaction-services unit, which is one of Citigroup’s most lucrative and fast-growing businesses, the people said.

Mr. Pandit, an enthusiastic defender of Citigroup’s existing mix of businesses, is loath to pursue such an approach, the people said.

Bank executives argue the company is well-capitalized, but that’s simply false. And the market knows it. As I wrote a few days ago, Citi’s true leverage ratio (after backing out goodwill and intangibles from capital and adding back off-balance sheet liabilities and commitments) is somewhere between 35:1 and 70:1. Even at the lower end, that means Citi is terribly vulnerable to a decline in the value of the asset side of its balance sheet. PR efforts highlighting the bank’s “strengths” are kind of hilarious:

Executives in recent days have been telling traders, brokers and other employees to reach out to clients and tick off a list of factors that showcase Citigroup’s strength. On Thursday, for instance, executives in the wealth-management unit arranged a Friday-afternoon conference call for clients. A brochure that brokers were asked to share with clients promises that the call “will help you to better understand the current financial crisis.”

The government won’t let Citi collapse. They’ll force a sale to another bank, like Chase, B of A, Wells Fargo, or perhaps a stronger, foreign rival. But the problem is that we’re just building a bigger time bomb. All of the above banks have very high leverage ratios. Fundamentally, they’re not in a significantly better position to withstand the crisis than Citi. The government will, perhaps, try to roll up all private banking assets into one super bank, which will receive unconditional government support. And yet, the potential failure of the super bank could blow up even the government’s balance sheet.